Flawed Federal Reserve is better than alternatives

Federal Reserve Chairman Ben Bernanke spoke in Indianapolis last week, and I was lucky enough to sit with a group of smart folks during his talk. I found three elements particularly interesting.

First, Bernanke does not believe that we are in a recession. While I, and a growing number of my colleagues, think we are either in or at the cusp of one, the more relevant point is that the current level of economic growth is slow enough to make us worse off, not better. That leads to his second point.

Bernanke defended current and past Fed actions, most especially the decision to keep interest rates low and money supply high while unemployment rates and a general economic slowdown threatened. He also defended some new policy innovations (QE3 and Operation Twist). The details are too long for this column, but suffice it to say, he reiterated that monetary policy was not a panacea for our economic woes. He singled out our unsustainable public debt, a poor tax code and educational issues as areas for which more long-term focus was needed. These items should not be news to readers of this column, and it is refreshing to hear them repeated.

Interestingly, Bernanke was asked whether or not his well-known fondness for baseball held lessons for economic policy. He pointed to the long-term focus of the Washington Nats as an example of a successful strategy. Good stuff.

The real reason for his visit (as if one really needs an excuse to visit Indiana in early autumn) was to better explain the role our central bank plays in our economy. This should hardly be needed, but there is more than a fair bit of mindless antipathy towards the Federal Reserve in this election season. On the left we hear that the Fed is a servant to moneyed interests and must be ended. On the right we hear that the Fed should be closed in favor of the gold standard. Both positions have a long way to go before they could be labeled as naive.

The Federal Reserve system, like the Congress that sets its mandates and the electorate itself, is imperfect. There is much to criticize in the Fed's actions, but, when laid against Congress or the Illinois legislature, the Fed look like a saint. To abolish it requires a belief that its replacement would be an angel. In abolishing the Fed, we leave the potent tools of monetary policy to the president – there is no other option. Either the president controls monetary policy directly, or he controls the gold standard indirectly.

While one might wish to give a president monetary policy tools, it is useful to remember this would place more power in the U.S. presidency than any since Lincoln. To suppose that we could craft a gold standard that would be immune from manipulation is again folly. We live in a world where human beings, not angels, make decisions about fiscal and monetary policy. It is best to stick with the least imperfect of human institutions.

Michael J. Hicks is director of the Center for Business and Economic Research and associate professor of economics at Ball State University.